Mainter Ltd. is seeking to replace a new machine with a total installed cost of $438 000. The cost of the machine will be reduced to zero using straight-line depreciation over a four-year expected life. At the end of the expected life, the machine is expected to be sold for $69 000. By switching to the new machine, the company is forecast to save $129 000 per year in pre-tax operating costs. In addition to the total installed cost, the company requires an initial investment in net working capital of $29 000 to support the machine project, which will be recouped in full at the end of the expected life of the new machine. The company has a tax rate is 35% and its before-tax cost of capital is 9%.

Required:

a) What is the amount of depreciation available to the company each year over the machines expected life? (Show all workings).

(2 marks are allocated to this part of the question)

b) What is the amount of the relevant annual cash flow resulting from the depreciation amount? (Show all workings).

(1 mark is allocated to this part of the question)

c) What tax amount receivable / payable, if any, arises from the expected sale of the machine? (Show all workings).

(2 marks are allocated to this part of the question)

d) What relevance, if any, arises from the discussion of net working capital in this question regarding capital budgeting. Does this net working capital amount have any tax consequences for the company?

(3 marks are allocated to this part of the question)

e) Provide and briefly explain an example that could have created the net working capital referred to in this question?

(2 marks are allocated to this part of the question)

f) What annual after-tax net cash flows arise for each period over the life of this project? (Show all workings).

(3 marks are allocated to this part of the question)

g) What is the NPV of this project? (Show all workings).

(1 mark is allocated to this part of the question)

h) Would you advise the company to accept / reject the project Briefly explain?

(2 marks are allocated to this part of the question)

i) What would be the minimum cost of capital the company would require in order to accept this project? (Show all workings).

(1 mark is allocated to this part of the question)

[This question is allocated a total of 17 marks]